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Suppose in the New Keynesian open-economy model that there is a negative output gap and the central bank decreases the current money supply. (a) Assuming

Suppose in the New Keynesian open-economy model that there is a negative output gap and the central bank decreases the current money supply.

(a) Assuming that the exchange rate is flexible. Draw diagrams for the labour, goods and money markets, and the production function. Determine the equilibrium effects of this decrease in the money supply on employment, output, consumption, investment, money,

real wages, the real interest rate, the price level and the exchange rate. Provide a detailed economic analysis explaining your results with the aid of the diagrams.

(b) Repeat part (a) for the case of a fixed exchange rate.

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